The “King of Hedge Funds” Defeated The SEC & Will Be Back in 2018. Here’s Why That’s a Good Thing…

Fresh out of Wharton Business with an economics degree, a young options arbitrage trader was excited to start his first day on Wall Street. Like most other young men in the industry, he was remarkably ambitious. What would set him apart was the nearly $8,000 in profit he would make by the end of that first day on the job.

Now worth almost $10 billion, Steven A. Cohen is the very definition of success in the hedge fund industry. At least he was until early 2013, when the Wall Street Journal (incidentally, the same newspaper that had dubbed Cohen “King of the Hedge Funds” in 2006) implicated him in an insider trading scandal.

Ever since then, there have been two different views on what Cohen represents. For some, he’s a man with exceptional skill who charged his clients 3% in management fees and took 50% of their profits to build his wealth over the years. For others, all he’s really good at is insider trading.

The Dark Days of Hedge Funds

Hedge funds are going through a rough phase, to say the least. These are dark days for an industry that is struggling to show performance and is widely regarded as the embodiment of all that is wrong with Wall Street. Hedge funds have lost billions of dollars over the past few years, many of them have shut down and they’ve managed to do all this while charging extraordinarily high fees for their services. The return of those services? 3.3% net return on average.

Low performance and high losses are bad enough, but to add to the industry’s problems, the public perception of money managers has shifted in the past decade. The financial meltdown in 2008 saw a destruction of Wall Street’s brand. In response, the SEC has been getting tougher on those who work in the industry. The Securities and Exchange Commission has been setting records for the fines it has dealt out over the past few years and has been bringing lawsuits and court cases against more industry insiders than ever before.

It was only a matter of time before the spotlight was on Steve Cohen’s SAC Capital Advisors hedge fund. It all started when the SEC charged some managers and former managers of the firm with insider trading. They said the company’s culture was ruthless, high pressure and very stressful, which pushed some managers to trade on inside information just to show results. Cohen, being the founder and manager of the hedge fund, has personally signed off on the trades.

The fund could afford to hire excellent lawyers for the case, who did a fine job arguing that he was not aware of the basis of those insider trades and had no knowledge this was happening at the company, but by July 2013 the SEC had charged him with a failure to stop insider trading at the firm. SAC pled guilty in November of that year and paid a record $1.8 billion fine.

As part of the scandal, the SEC barred Cohen from taking outside money and he started a family office called Point72 to manage his own money.  But Cohen was successful in settling the SEC’s “failure to supervise” case against him this year. This means that he cannot handle outside money till 2017, but can start managing investor’s money from the first day of 2018.

The hedge fund comeback

Here’s why that’s a good thing. While it’s hard to argue that his stellar performance as a manager was partly due to inside information, Point72, the hedge fund Cohen ran while the case was ongoing has still performed remarkably well. It is up 12% while the average hedge fund lost money. Cohen wasn’t directly accused of insider trading and it is nearly impossible to trade on inside information while you have a case ongoing with the SEC. This just goes to show how good he is at what he does.

If that’s not enough to satisfy the skeptics, perhaps it helps that the SEC staff have personally agreed to hire an independent consultant to monitor the company. This outside consultant is there to closely inspect how the fund operates, come up with recommendations for how things should change and make the company implement those recommendations.

The SEC has its eye on Steven Cohen’s activities and, should he choose to return to the world of managing money in 2018, you can be certain he’ll be doing so under their watchful eyes. But he has excelled in this situation before and that means that investors who trust him with their money can likely expect a positive outcome.

About the Author:

Andrew May is a hedge fund attorney and the founding member of the finance and business law firm, May Law in downtown Chicago.  In addition to advocating for his clients, he enjoys sharing his expertise and passion for the industry through guest blogging on a variety of online publications.  For more, visit www.Maylawpc.net.